|Shares Out. (in M):||49||P/E||10.8x||9.7x|
|Market Cap (in $M):||3,200||P/FCF||11.0x||10.0x|
|Net Debt (in $M):||780||EBIT||562||614|
Dun & Bradstreet provides commercial information, including credit data and marketing information, to businesses worldwide. DNB’s databases contain over 150 million business records and related tools and its customers use them to manage credit and supplier risk and convert sales prospects. The company’s sales mix is about 65% Risk Management Solutions (catered toward Fortune 1000 clients), 30% Sales & Marketing Solutions (marketing lists, CRM solutions), and 5% Internet Solutions (primarily Hoover’s customer reports).
DNB also operates globally with 70% of revenues from North America and 30% from Asia and Europe. In recent years, DNB has been actively pursuing tuck-in acquisitions in emerging markets such as China, India and Brazil.
o DNB’s global database is nearly impossible to replicate and has high barriers to entry.
o Data is focused on commercial clients and has less regulatory risk relative to consumer credit information services companies (Experian, Equifax, Fico)
o DNB business has attractive financial characteristics – high ROIC, low capital intensity, high free cash flow generation, scalable margins and healthy balance sheet
o DNB embarked on a 2-yr $120 mm technology upgrade in 2010.
o Company expects to roll-out new products and extract further cost saves starting in mid-2012.
o Potential upside to consensus estimates, particularly if deep recession can be avoided
o DNB is trading below 10x 2012 earnings and 6.5x forward EBITDA, near the low end of its historical valuation range.
o Information Services comps are currently trading at 7-8x forward EBITDA multiples (but many are in consumer businesses which have far greater regulatory risks).
o Buyouts by private equity and strategics have averaged above 9x EBITDA.
Shareholder Value creation
While DNB management has had a history with financial innovation (spinoffs of Nielsen, RH Donnelly, Moody’s and IMS Health), they have been less active over the past decade. I see 2 distinct opportunities for activism.
1) Scenario 1: DNB is underlevered. The company can raise debt (by 2 turns to 3.5x EBITDA) to repurchase shares. This would be 35% accretive to earnings. (Note, DNB currently has a $500mm buyback program in place but I believe they have room to be more aggressive.)
Assumed interest rate on debt 5.00%
Effective tax rate 35.0%
Debt Capacity $1,245
Assumed purchased share price $68.00
Number shares to be repurchased 18.31
Percentage of total diluted shares 37%
EBITDA 560 572
Proposed Debt/EBITDA multiple 3.5x 3.5x
Total debt capacity $1,960 $2,003
Current net debt 778 758
Incremental debt raised for buyback $1,182 $1,245
Net Income (current) 299.8 306.2
Old Share Count 49.7 49.7
Current EPS $6.03 $6.16
Interest expense 62.2 62.2
Tax-effected interest expense 40.5 40.5
Adjusted Net Income 259.3 265.8
Adjusted Share Count 31.4 31.4
Post-Repurchase EPS $8.26 $8.47
Accretion / Dilution (%) 36.9% 37.4%
2) Scenario 2: 60% of DNB business in higher margin, more scalable Risk Management Solutions. Remainder is in Sales and Marketing (marketing lists, customer files - fairly commoditized businesses) and Internet Solutions (no real synergies with rest of DNB).
i. Persuade management to sell Sales and Marketing and Internet Solutions. Possible buyers would be Acxiom, Epsilon unit of ADS, InfoGroup (owned by CCMP), Equifax.
ii. Assuming a 5-7x EBITDA multiple for the SMS business and 2.5x revenues for the internet business, I arrive at roughly $1-1.1 bn valuation for these 2 businesses.
iii. Using the after-tax proceeds of this transaction to repurchase shares would result in 5-7% accretion to EPS.
iv. While earnings accretion is not meaningful, the new DNB with more focus on RMS will lead to a re-rating of the stock given its higher margin potential and more scalable platform. I expect “Newco” to trade closer to a take-out value of 8-9x EBITDA, yielding a target price of $85-90 per share.
I view valuation through a targeted multiple and sum-of-the parts approaches. Currently, info services comps trade at 7-8x forward multiples. Furthermore, private equity transactions in the sector have averaged over 9x EBITDA multiples. A SOTP analysis using a mix of private and current public market multiples (8-9x EBITDA for Risk Management Solutions and 5-7x EBITDA for Sales & Marketing) yields a target price of $85 per share.